MISC Berhad (MISC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to MISC Q3 FY 2020 Analyst Briefing Conference Call. Rozanah Hamzah from MISC Investor Relations team will run through the agenda for today's briefing. Rozanah, over to you.

Thank you, Akadi. A very good evening, ladies and gentlemen. Thank you for participating in our third quarter financial year 2020 analyst briefing. My name is Rozanah Hamzah from MISC Investor Relations, and I am your host for this evening. We have with us today Mr. Raja Azlan Bin Raja Azwa, Vice President, Finance; Ms. Eslin Halimi, Head of Financial Reporting, Governance and Budget, Finance; Mr. Emran Othman, Vice President, Corporate Planning; Mr. Vincent Ng, General Manager, Corporate Planning; and Mr. Suhaimi Saad, General Manager, Corporate Planning. We will now proceed with the presentation on financial highlights for the quarter's performance, which will be presented by Ms. Eslin, followed by market outlook and business update by Mr. Vincent. At the end of the presentation, we will open the line for a Q&A session. Our event manager will later provide instructions on the Q&A process. Before we start with the presentation, I would like to bring to your attention the disclaimer slide. During the presentation, we may make some forward-looking statements in reference to our plans and expectations, and actual results could differ due to unknown risks, uncertainties and other factors that are in many cases beyond MISC's control. With that, I pass the session to Ms. Eslin for our next agenda, the update on MISC's third quarter financial year 2020 financial performance. Ms. Eslin, over to you.

Good evening, everyone. Thank you, Rozanah. Thank you to the participants for joining MISC Berhad's Quarter Three FY 2020 Analyst Briefing. I bring your attention to Page 3 of our AB pack. Lower revenue for the quarter, mainly due to the lower revenue from Petroleum segment as a result of lower blended TCE from mid-sized tankers and VLCCs as well as earnings days due to vessel dry-docking and vessel disposal. Lower revenue from LNG segment was mainly due to the dry-docking activities in the current quarter. However, the above was offset by the higher revenue from heavy engineering, mainly due to the yard suspension during MCO and border restrictions in the preceding quarter. Lower PBT from operations during quarter mainly due to the lower revenue, as mentioned above. For the nonrecurring items during the quarter, there was an impairment of FSO, whereas in preceding quarter, there was an impairment of LNG vessel and heavy engineering impairment, property plant and equipment as well right of use of assets. And also there was a gain on disposal of a petroleum vessel in the preceding quarter. On Page 4 of our AB pack, lower revenue mainly coming from Petroleum segment as a result of lower earning days due to lower number of vessels in operations and vessels went for dry-docking. Also lower revenue from offshore due to the reducing finance lease income and contract expiry of an FSO in December 2019. Lower revenue also contributed from the LNG segment, mainly due to the lower earning days following dry-docking activities, as mentioned earlier. However, the above was offset by the higher revenue from heavy engineering, mainly due to the increased activities in an ongoing project. Lower profit from operations during the quarter recorded mainly due to lower revenue as explained earlier. On Page 5 of our AB pack on the cash flow from operations. Our cash flow from operations continuously recorded a reasonable level comparing between preceding and corresponding quarters, mainly due to the collection from LNG, petroleum, offshore and MHE main business segments. However, the above cash flow from operations from both preceding and corresponding quarters was offset by the nonpayment by a client as a result of the ongoing legal case. On Page 6, our debt balances hovering around USD 3.2 billion since September 2019. This was mainly due to the quarterly payment and drawdown for the project, which is in the pipeline. Now we're moving on to the financial performance by business segment. On Page 7, for LNG business, revenue and profit before tax were quite stable between the comparative quarters. The variation in the revenue and profit before tax mainly came from the dry-docking activities, which came into those quarters. For Petroleum segment on Page 6 -- sorry, on Page 8, lower revenue recorded as compared to preceding quarter, mainly due to lower TCE rates for midsized tankers and VLCC as well as lower earnings days due to lower number of vessels in operations as well as dry-docking. Lower revenue also recorded as compared to corresponding quarter, mainly due to lower TCE rates for Aframax vessels and lower earnings days, as explained earlier. However lower PBT for Petroleum segment as compared to preceding quarters, mainly due to the lower revenue, as mentioned above. On Page 9, for offshore business segment, the revenue reported are quite stable as compared to preceding and corresponding quarters. The main movement on quarterly basis were due to the reducing finance lease income, as explained earlier. In addition to profit before tax, the profit before tax was lower as compared to the preceding quarter, mainly due to lower share of profit from joint venture, as mentioned in the Bursa announcement. Finally, in the last segment on Page 10 for the Heavy Engineering segment, revenue recorded for both preceding and corresponding quarters, mainly from increased activities in ongoing Heavy Engineering projects. Heavy Engineering segment recorded a profit before tax in the current quarter, mainly due to the higher revenue as explained above. I will now pass to Vincent for market environment and business updates.

Thanks, Eslin. Hello, everyone on the call. Thanks for joining us this evening. I'll take you through on the market environment. Firstly, starting with the LNG shipping market. From the Page 12, you can see that we did see some improvement in the spot charter rates for LNG vessels in the third quarter. And this trend has continued into October. We see that the spot rates have been trending upwards even in October. And so these all bodes well for the fourth quarter, which is traditionally a strong period for spot rates due to the onset of winter in the Northern Hemisphere. In addition, this year, there has been some predictions of severe winter. So this is expected to drive further demand on top of the recovering economy, especially in North Asia. So hopefully, that will drive more demand for LNG in the winter months and this would strengthen the charter rates as well. Moving on to Slide 13 or Page 15. Looking at '21 and '22, you can see that quite a large number of LNG carriers are due to be delivered. In 2020, there are 44 and goes slightly up to 53 before falling to 29. Due to the relatively large number of deliveries, we see that this will pose some pressure on the freight rates for the next couple of years. At the same time, with the ongoing pandemic, we noted that with the effect on economic growth, therefore, a number of LNG projects that were planned for this or next year may be deferred. And this will lead to a subdued demand for new buildings for LNG vessels over the next couple of years. Nevertheless, I just want to remind that this would not have a significant impact on MISC's LNG performance as most of our vessels are on long-term charter. Going to Page 14. Petroleum, after a very strong first half, you can see that the spot rates have plunged in the third quarter and have remained under pressure since then, even up to October. So the tanker market, as you know, would have been affected by the lower seaborne oil trade volume, and this has been compounded by the unwinding of floating storage, as more vessels coming out of floating storage will enter the fleet and thereby increasing competition. We think that the weak market will persist until the end of 2020, notwithstanding that usually the fourth quarter is a strong season. But this year, we are not too sure that that will be true. So it will probably be quite a relatively weak fourth quarter. Having said that, the 2020 will not be such a good year towards the end, although we had a very good first half, we look forward to the medium term. If you turn to Page 15. Very much, we can see that the new deliveries of tankers are tapering down. We had a very large level of deliveries in 2019. That has fallen in 2020 and will remain relatively subdued in '21 and '22. So this supply side picture will help a little bit and support the charter rates going forward. The other thing that we're -- we are watching closely is on the demolition, the scrapping of old vessels. You can see here also on the chart on the right that the year-to-date 2020 has been a very low year for scrapping. In fact, it's been forecasted that tanker demolition in 2020 is expected to keep the lowest level in something like 29 years. Right? So some of the reasons include the very strong charter rate that persisted for the first half, thereby, some of the owners have decided to defer scrapping of their old vessels. There was also quite a lot of demand for floating storage. Additionally, in terms of the recycling yard, it was noted that they faced closures during the -- because of the pandemic, and then there was the customary monsoon season towards the middle in the quarter of the year, right? The steel scrap prices were also not that favorable, although we see there's a little bit of that strengthening. So I think this area of scrapping will be watched closely as we go into 2021, and it would also affect how fast the tanker market can recover. Going to Page 16. This is to cover the offshore segment. The chart here shows the E&P CapEx, historical as well as forecasted by IHS Markit. You can see that there's been a significant drop in 2020 for CapEx and not expected to really recover to 2019 levels at least until 2025. A large chunk of that was due to reduced CapEx, especially on the North American shale sector. Having said that, we noted that the -- in terms of the offshore FPSO segment, there are still activities, especially around Brazil. And in fact, for Brazil, it is expected to be the largest market by far for FPSOs over the next 5 years according to analysts. And in addition to Brazil, there will be some opportunities in other markets as well, although not to that size. That concludes the market environment segment. And I now move on to business update. For the LNG business, we continue to take opportunities in conventional and nonconventional solutions. Post the third quarter, we took delivery of our LNG bunkering vessel, Avenir Advantage, that has come into service for our client PETRONAS. And in fact, did its first bunkering very recently. The other thing we took delivery of was our first of our 6 Very Large Ethane Carriers. So as you recall, we announced that earlier in the year. And the first vessel, Seri Everest has come into service and are charted up to our client, Zhejiang Satellite Petrochemical, for 15 years. So the other 5 are yet to -- will be delivered progressively. In the Petroleum segment, the current portfolio mix is 65 term and 35 spots. And you will notice that this has gone down a little bit compared to the previous quarter. Although our VLCCs are still very much in the time charters, a number of our midsized tankers have spent more time in the spot market in the third quarter relative to the second quarter. The reason for this is mainly due to the lightering market. The lightering market has been subdued. A lot of the midsized tankers are deployed in the U.S. Gulf and because of reduced refinery activity in the U.S. and also reduced exports from the U.S., therefore, the lightering market was lower in the third quarter. And some of these vessels were, therefore, deployed to the spot market. In addition to that, we took delivery of the 2 DPSTs for Petrobras, Eagle Paulinia and Eagle Paraiso, during the third quarter. And this have entered service for Petrobras in Brazilian waters. During the quarter, we also sold 1 VLCC, which is Bunga Kasturi Dua. Going to the next page, on offshore business, Page 19. As you already know, the big news in the third quarter was the -- when we won the award for Mero 3 contract from Petrobras, which we announced in August. And this is our first big win for large-scale ultra-deep water FPSO, and it will be a 22.5 year charter contract. In the meantime, we still pursue opportunities, although as you know, the market is quite soft at the moment. In terms of our legal case or Gumusut Kakap Limited, I will not go through in great detail on this one. You can read it on your own in the post announcement. Just to highlight that in terms of the setting aside OS, or originating summons, and also the setting aside of SSPC third-party award, the court has directed the parties to exhaust -- exchange affidavit by November. And we expect that the hearing of the setting aside application to be held sometime in the first quarter of next year. For PCPP and MOMPL, again, I will not go into great detail, so you can refer to the disclosure in our announcement. Finally, I move on to Page 22, which is on our Heavy Engineering segment. As you know, this has been a challenged segment, especially in the second -- in the second quarter, but it has been recovering in the third quarter. So year-to-date, we've seen the sail away of our Bokor CPP as well as sale way of our Bergading Mercury Removal Unit from our base on our Heavy Engineering segment. In terms of marine repair, year-to-date, we have completed repair maintenance of 38 vessels and secured 44 new jobs as well as converting -- completing the conversion works for FSO Golden Star. The order book backlog as at September is RM 2.5 billion and the tender book is RM 12.3 billion, right? So in terms of MHB, Heavy Engineering segment, they are continuing to pursue opportunities out there and also looking forward to the completion of dry-dock 3, which is around before the end of the year and to come into commercial operation. So in the meantime, they will also be looking at diversifying their income revenue stream into modular fabrication and offshore wind farms. So I think with that that concludes my session. I'd like to pass you back to Rozanah.

Thank you, Eslin and Vincent, for the presentation on financial performance and business updates. With the completion of the presentation, I would now like to hand over the call to the event manager who will guide and manage the Q&A session. Akadi, over to you.

[Operator Instructions] Our first question is from Alex Goh from AmBank.

A few questions from me, please. The first is on the dry-docking days for the petroleum tankers as well as the LNG. Could you give us the number of days in the third quarter compared to the second quarter and the third quarter of last year? So that we can actually see the difference and the impact it had on your revenue. And this can do a bit more privately on that. The other thing I noticed, your interest charges keep dropping, quarter-on-quarter, was down 25%, even though your gross debt was relatively unchanged. And it's been a trend like going downwards since then. Could you give a bit of clarity on why is that happening? The third question is, could you tell us which FSO was impaired. And I have also noticed that the -- there was also the contract expiry of an FSO. Is that related in -- to the -- in December 2019 and reduced finance lease income? Okay. That's roughly my questions.

Alex, Azlan here. In terms of dry-docking days, we're not going to be very specific here. But basically, we are looking at the dry-docking days for LNG to be less than 50% of what it was in 2019. In terms of the interest charges, which you see dropping. This is mainly because of the LIBOR has reduced immensely over the past 1 year. If I just take 31st of December 2019, LIBOR was at about 1.9%. Today, LIBOR is 0.23%. So this has helped to reduce interest charges during the year. Insofar as the FSO that was impaired. This is FSO Angsi where we made an impairment of USD 2.3 million during the year.

Just a follow-up. In your fourth slide, you mentioned that there was an expiry of an FSO, was that Angsi in December 2019? And where you face, what, reducing finance income. Was that mainly an accounting adjustment?

The FSO that we referred to was FSO Angsi. In terms of the impact of reducing finance interest income, that relates to 2 of our floaters. And this is the nature of finance lease accounting where it is on a reducing balance. Every year, the P&L interest that is recognized reduces over time.

Okay. Just to come back on the dry-docking days. You mentioned that for the LNG days, what you are expecting the number of dry-docking days being 50% lower compared to 2019. Is that -- did I get it wrong?

That's right. That's right. It's correct.

But you said -- but if -- but should they be the reverse because your -- the revenue dropped, that should mean your dry-docking days should have gone instead?

There was some days -- off-hire days due to COVID.

Some days that it was off, not because of dry-docking, in other words?

No, no, because of off-hire.

Is that the same also for your petroleum tankers?

It was not -- petroleum tankers was less -- there was less off-hire days.

Okay. Less, but there was also the effect compared to the LNG?

The main was seen in LNG.

I see. Okay. Could you also give us a bit more clarity. Going into this fourth quarter, should we expect more impairments to any of your other vessels?

At the moment, we do not expect any. We will be doing that exercise -- I mean based on the third quarter assessment, there wasn't any, but we will be, as part of our year-end review, we'll take a look at it again. At the moment, we don't anticipate much. Or, if anything, it should be just a small impairment.

Okay. In other words, you've already made much of whatever provisions you think you already needed so far, like, in the first 9 months of this year. Am I right?

That's right. That's right.

Next, we have Kong Ho Meng from UOB Key Hian.

I'll have a few questions. If you don't mind for me to go through one by one. My first question is regarding your -- the petroleum spot mix, and you mentioned earlier that it was due to the lower lightering demand and that caused your spot mix to be higher. Can I have your outlook for the fourth quarter? I think recently, the Aframax rates have been going up again, I believe the lightering rate is improving. I mean the lightering market may have been improving. Are you responding to it? Or are you still seeing that your spot mix in the fourth quarter is still relatively as high as the third quarter?

Do you want to take that one question at a time? I think that's easier, right?

You want me to go through all my questions? Or...

I think maybe why don't we answer one. Then you go through a few. Maybe you talk what was the first question, since I'm on the line. The spot mix, I think -- I don't see that it -- I think the pressure will still be there in the fourth quarter. I don't know if there could be a little bit of lift due to weather -- I mean the seasonal pattern. But it wouldn't be that material. So I wouldn't want to say that we see that it will be a very strong lift in the fourth quarter. So I think we don't -- and I can't really comment. Yes. So this now, I think October rates were pretty low. So I don't know that November and December can be that much better. So if there is a business, that would be very good, but I won't bang on it at the moment.

Safe to say that your October numbers has not seen any -- has not seen much improvement on the lightering side, basically, right? So...

I can't comment on our October numbers. I can only comment about the market rates in October, which were quite low generally. So I think the portion of our fleet that's on spot will be affected in that manner.

Okay. And on your time charter mix, right, how many were renewed in the third quarter -- in terms of franchises being new to -- or I mean basically the number of renewals for your Petroleum side?

Yes, I don't think we want to go into too much detail on that. I think we have a hand of deal now. Every quarter, we do have some renewals. So -- yes.

Okay. So basically, if you go by the vessel segments, right? So I -- is it like your VLCC is still mostly or almost entirely on the time? If I missed that in terms of mix, it should be a lot more than 30%, right, I guess? And since then it did like 9%, like, similar to your second quarter?

We can share with you, as we have done in the past, I can share with you the mix for the -- each of the business. Okay, I will do that. So for VLCC during the quarter, the term to spot ratio was 91:9.

Okay.

For Suezmax, it was 81:19.

Okay.

And for Aframax, it was 49:51, term to spot.

51% spot.

So the Aframax, as you see now, the largest part of our fleet, was quite a lot in the spot during the 2 quarters. That is why it bears the overall term to spot ratio during the quarter.

Okay. Got it. Okay. I'll move up quickly to my next question. The CapEx that was incurred in the third quarter, is that mainly for the VLECs? And is it a portion of your cost capability is all being paid for all the 6 vessels?

Sorry, I didn't quite get that CapEx. Is that on CapEx?

Yes, yes, correct. There was a jump in your CapEx in the third quarter, is that largely for your VLEC?

Yes, that's largely for the VLECs, Kong Meng. For the VLECs -- we made some payments for the VLECs, yes.

So is it all paid? Or is it progressively being paid. We should see more in the fourth quarter until all the vessels have been delivered. Is it?

Yes. There will be further payments in the fourth quarter as well.

Okay. how much of the...

Progressively.

Okay. So out of your total cost, right, is it like 1/3? Or is it big in the third quarter? How should we see it like?

Yes. About 1/3 was paid in the second quarter -- in the third quarter, sorry.

Okay. Okay. All right. And you mentioned about the off-hire days in LNG. I think you mentioned in your Bursa payment that because this was the pandemic effect, are you able to say how many -- how much of the off-hire days for the LNG and whether this is going to be recurring in the fourth quarter? Or the four quarter numbers will be better in terms of less off-hire days compared to the third quarter?

Yes. I mean we certainly wouldn't want this to recur. Because this is related to some COVID cases, we hope that we will not have to have any recurrence of these off-hire days.

Okay. You mentioned because there were COVID cases, is it -- or was it more like maybe no COVID cases within your vessels, but more quarterly, as you said, by -- what was actually the mix?

There was -- one of our vessels were affected. So that's why we went off-hire for, I think, about 10 days or so.

I see. I see. And -- okay. But so far had been resolved already? Or is still undergoing currently in the fourth quarter?

No, it has already been resolved.

I see. All right. Next question, you mentioned about the -- there were some late deliveries of the banker an FSO in the Golden Star. Were there any penalties? And are they legit? And if there are, have you provided for it?

Sorry, you're referring to the late delivery of vessels. Yes...

Yes, you mentioned that in your -- yes, correct.

We don't see any material impact from that.

So there were some penalties but not material. Is it fair to say that? Or...

No, no. There are no penalties. This relates to the our own vessel, which was deployed to the site. Currently, that vessel is a floater in Vietnam, which is currently under commissioning. There's no penalty involved there.

Okay. Got it. Last question from me is there was a $13 million impairment on the receivables that is, Raja, from which project or which business segment.

Those were some experiments that we did across the board. Yes.

Next, we have Raymond Yap from CGS-CIMB.

Just 3 questions from me. The first one is on the dividend. Last -- on October this year, you've been maintaining the same level of dividends as you had paid for the first 9 months of 2019. Should we also expect that the final dividend will come to $0.09 and also that you might pay another special dividend at the end of this year as you had paid for last year's fourth quarter? The second question I have is on 3 buckets in Balhaf. I know that these have left the original employment. Is there -- what are the developments over there? And is there any chance that you might re-deal with Yemen LNG anytime? And the last question is on the sale of the Bunga Kasturi Dua. I'd just like to check whether Bunga Kasturi Dua is earmarked for the Mero 3. And if that's the case, is it really a sale? Or is it just a transfer -- internal transfer?

Thanks, Raymond, for your questions. On the first question relating to dividend. Certainly, we booked that we will be able to retain or improve the level of dividends for the fourth quarter or at the end of the year subject to our Board. Insofar as the -- I'll take the last question. Insofar as the BK, this will be sale of asset from a Petroleum division to the offshore unit. The BK2 is a VLCC vessel, which was sold by the petroleum unit to the offshore unit for the Mero 3 project. So it's just a case the company charges from...

Right. Okay. All right. Sure. So it doesn't appear in the financial statements and...